World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Wednesday, May 12, 2010

Equity futures are higher this morning following yesterday’s mixed close. The RUT led the advance yesterday and is showing relative strength again with the so called “risk trade.” The dollar is down slightly and the Euro is roughly flat. Below is a daily chart of the dollar on the left and the Euro on the right. Note how the Euro has failed to recover despite the Trillion dollars/euros that were just tossed at it:

Should the Euro break beneath the 1.26 level, look out.

Bonds are down, oil is up only slightly and is still resting on support, gold has broken out to new highs and just touched a stunning $1,245 an ounce. The move in gold is very steep, the Point & Figure chart for gold is looking for a price target of $1,310 an ounce:

The worthless MBA Purchase Applications index did a 180 from the week prior with the refi index rising a completely unbelievable 14.8% for the week, and the purchase index falling 9.5%! Why do we not laugh these clowns off the planet? Here’s Econoday:

HighlightsThe end of second-round housing stimulus made for a 9.5 percent drop in purchase applications according to Mortgage Bankers' data for the May 7 week. The drop reverses a run of increases in late April including a 13.0 percent jump in the April 30 week as buyers rushed to get a contract in place before month-end.

The outlook for the housing sector is uncertain but has improved in the last few weeks as mortgage rates have moved unexpectedly lower, the result of Europe's sovereign debt troubles and the resulting flight to safety, specifically flight to U.S. Treasuries. Home owners are taking advantage of the move and are refinancing their mortgages as the refinance index jumped 14.8 percent in the week. Mortgage rates fell in the week led by a 6 basis point decline in 30-year fixed loans to an average 4.96 percent. Next data on the housing sector will be the housing market index on Monday.

Riiiigggt, a 6 basis point rate move causes a 14.8% rise in just one week… pleeeaase, just how gullible do they think we are?

Oh, that’s right.

“Data” like that is exactly why you should have no confidence and is yet another reason gold is hitting all time highs.

Good thing the trade imbalance widened to a one year high or otherwise we’d really be in trouble. Coming in at “only” -$40.4 Billion, that is, after all, a third less than the $60 Billion monthly deficits we used to run:

HighlightsThe March trade gap widened to $40.4 billion from a slightly revised deficit of $39.4 billion in February. Imports and exports jumped 3.1 percent and 3.2 percent respectively. The trade gap, which was smaller than the expected $41.0 billion was due in part to sharp increases in both the price and quantity of energy imports. Trade deficits with most major trading partners widened including those with China, Japan and the European Union.

The petroleum goods gap widened to $24.8 billion from $23.0 billion in February. However, the nonpetroleum gap narrowed thanks to the large export increase. And combined with a larger services surplus it suggests that excluding petroleum, the overall gap would have narrowed. Other imports categories posted solid gains, particularly auto imports. At the same time, exports of industrial supplies, which include some energy products, and consumer goods posted solid gains.

The unadjusted crude oil barrel price rose to $74.32 which is the highest since October 2008, while the volume of crude oil imports rose to 299.5 million.

Did someone mention oil? In a scene that looks like a precursor to the movie Mad Max here’s some amateur video of the Gulf oil slick taken five days ago:

This spill is certainly historic in nature and will indeed impact the economy going forward. It may even turn out to be a turning point in making energy more expensive to obtain. If we were collectively intelligent (we're not), we would be racing for REAL energy solutions, but sadly we are too preoccupied with a collapsing economy due to the decay of the rule of law.

Think back over the first three months of 2010… remember the massive up days on Mondays that turned into a 90% probability? Remember how the majority of the move occurred in the premarket giving the little investor NO opportunity to enter unless they jumped in the Friday before? And then remember how the Monday ramp morphed into the late Friday ramp in order to get in front of the “sure thing” bet? Now think back to the three options expirations weeks and the gyrations in the market leading up to them…

Now tell me what the odds are that any individual investor could have made money on every single trading day of that quarter… being struck by lightning, twice, would be way better odds I’m sure. Yet our big banks are so good that FOUR of them were able to earn money and not lose a single penny each and every single day:

May 12 (Bloomberg) -- Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival.

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.

“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

‘Implausible’ Proprietary ModelWells Fargo & Co., the No. 4 U.S. bank, doesn’t disclose how many days it had trading gains or losses, said John Shrewsberry, head of the bank’s securities and investment group. Bank of America declined to comment beyond its filing, according to spokesman Jerry Dubrowski. JPMorgan also wouldn’t comment, spokesman Joseph Evangelisti said. Fed spokesman David Skidmore didn’t reply to an e-mail left after regular office hours yesterday.

At Goldman Sachs, which is contesting a fraud lawsuit from the Securities and Exchange Commission tied to the sale of a mortgage-linked security in 2007, net revenue was $25 million or higher on each of the days it traded. The New York-based firm said it made more than $100 million on 35 of those days, or more than half the time.

The company’s fixed-income, currencies and commodities businesses and equities unit generate those returns by making markets for clients rather than betting the firm’s own money, Chief Operating Officer Gary Cohn said yesterday at a financial services conference in New York.

“There is often speculation that proprietary trading revenues drive our outperformance in these businesses,” Cohn said. “Over the last 12 months, we have only recorded 11 loss days. It is implausible that a proprietary-driven business model could be right 96 percent of the time.”

“Implausible” is right.

Hate to break the news, but skimming 3% off the yield curve isn’t going to produce $100 million DAYS. This fact is THE most illuminating tell on what’s occurring with the markets. They have been completely subverted – they have been destroyed and are now nothing but a controlled simulation.

Since the “banks” obviously now have authority to print cash from the market, you would think that would make them the buy of the century. I mean how could that possibly go wrong?

Don’t worry; the punch line will be obvious when it comes.

The markets have generally been stopped by the 50 day moving average. However, the RUT and the Transports are back over it today. While guessing the direction of the computer simulation by a mear mortal is obviously a fool's game, I continue to believe that this market looks sick. The Euro is not responding to the electro-shock paddles, the coronary continues, confidence continues to erode.

Statistics like the MBA Purchase Index don’t help to inspire my confidence, nor do government statistics like the supposedly 290K jobs that were massaged into being. If you ask me if I think they would lie to you, honey, well…